Diversification of Raw Materials Needed Amid Soaring Prices
Due to uncertainties in the global economy, prices of almost all raw material commodities have increased. The fall in the rupiah exchange and the world inflation surge have only worsened the situation.
By
AGNES THEDOORA
·5 minutes read
JAKARTA, KOMPAS — The surge in world inflation and the weakening of the rupiah exchange rate have caused a sharp increase in prices of industrial raw materials. In order to cope with supply uncertainty, the diversification of raw materials and the improvement in supply-chain efficiency are needed to keep production running.
Many industries such as food and beverage producers have difficulty in obtaining quality raw materials at affordable prices. Prices of raw materials have significantly increased due to the disruption in the supply chain and geopolitical tensions as the result of the Russian-Ukrainian war, in addition to export restrictions imposed by a number of countries.
The chairman of the Association of Indonesian Food and Beverage Producers, Adhi S Lukman, said in Jakarta on Tuesday (5/7/2022) due to the uncertainty in the global economy, prices of almost all raw materials for food production had increased. The price increase was also further exacerbated by the decline in exchange rate of the rupiah against the United States dollar.
At the close of trading on Tuesday, the rupiah dropped to Rp 14,985 per US dollar, closer to the psychological level of Rp. 15,000 per US dollar. The weakening of the rupiah exchange rate also put pressure on the national manufacturing industry, which still has a high dependence on imported raw materials.
Industry players have also struggled to find alternative solutions to obtaining affordable raw materials, keeping production running and ensuring their cash flow will remain under control.
As a consequence, many industry players have to reduce their profit margin in order to maintain demand despite the increase in production costs.
“Production costs have increased by 10-15 percent during the last six months. Actually, we need to increase prices again, but for now, wait and see, and choose to reduce profit margins. We fear that if we further increase the prices, it will affect the people's purchasing power and demand will decline," said Adhi.
Alternative formula
To address the uncertainty of the supply chain disruption, diversification and substitution of raw materials should become the main strategy. “We must have an alternative formula. If the raw materials are expensive, they should be replaced with something else. The industry must prepare stocks,” said Adhi.
Food commodities which are available in the country in large quantities such as corn, cassava and sago, can be used as substitutes for raw materials for a number of food and beverage products. For example, the raw materials for instant noodles that depend on wheat flour can be replaced with rice or corn flour.
Thus, the industry will not rely on imported materials and will be able to keep the prices of their products amid the increase in production costs. Another step is to improve the efficiency of the supply chain by cutting operational-cost components. Some industries are now thinking of “reshoring” or bringing the production center closer to the targeted market.
In the textile sector, the diversification and substitution of raw materials already began since the supply disruption started to affect the industry at the beginning of the pandemic.
The secretary-general of the Indonesian Fiber and Filament Yarn Producers Association (APSyFI), Redma Gita Wirawasta, said that during the last three years, the textile industries have begun to replace imported cotton-fiber raw materials with locally produced polyester and rayon.
The diversification of local raw materials continues, especially related to specialty products, such as refractory fiber/yarn, antibacterial yarn and dyed fiber. However, despite the diversification, the textile industry also feels the impact of the current supply chain crisis.
“The people's consumption is starting to decline right now, because they prioritize buying food products whose prices have all increased. What we need now is a change in import policy so that the domestic market can be protected from imported goods," said Redma.
The people's consumption is starting to decline right now.
Meanwhile, the chairman of the Indonesian Employers' Association, Hariyadi Sukamdani, said that most businessmen were able to cope with the surge in the global inflation which has caused an increase in prices of raw-material prices. As a consequence, the increase in the prices of the finished product in the market could not be avoided but is still within reasonable limits, he added.
"Even though the price is up, we try not to set it too high, because we also have to look at the people's purchasing power," he said.
The disruption of the supply chain has begun to affect the performance of the local manufacturing industry as seen in the decline in the Indonesian Manufacturing Purchasing Managers' Index (PMI). According to data released by S&P Global last week, Indonesia's Manufacturing PMI in June 2022 was recorded at 50.2. Although it is still expansive (above 50), it has declined from the previous months’ level and even started to approach the contraction zone (below 50).
The Industry Ministry’s Agro Industry Director General Putu Juli Ardika said the government was trying to reduce the impact from the increase in global inflation by encouraging the use of domestic products and import substitution. "This needs to be optimized by the industrial sector," he said.
This article was translated by Hendarsyah Tarmizi.